Millennials are way too conservative (well, financially speaking, at least). According to a 2016 Wall Street Journal analysis, twentysomethings’ most common money mistake is investing too conservatively, putting too much money into cash and bonds and not enough into equities. It’s understandable - between coming of age during the Great Recession, graduating into anemic job markets, and carrying record amounts of student loan debt, it’s no wonder that millennials are gun-shy about investing.

But while a low-risk portfolio produces better outcomes during a downturn, it’s a severe handicap in the long term. We’ll compare conservative and aggressive portfolios, discuss why your 20’s is the time to be bold (especially when it comes to your retirement accounts), and explain how to avoid common psychological pitfalls.

Back to basics: Comparing investment styles

First off, what does a “conservative” investing strategy look like, and what differentiates it from an “aggressive” one? An investment portfolio usually consists of a variety of financial vehicles, including money market funds, certificates of deposit (CD’s), bonds, and stocks.

Money market funds and CD’s are super-safe investments. CD’s usually guarantee a yield (averaging 0.54% in October 2014); money market returns hover around 2-3% but almost never lose money. Bonds are one step closer to risk: While they perform better than stocks during bear markets, they have much lower returns during boom years (think 5-6% for long-term government bonds). Finally, stocks are the most aggressive investment. Since 1990, the S&P 500 (considered a good indicator of U.S. stocks overall) varied wildly, from gaining 34% in 1995 to losing 38% in 2008.

A conservative investment portfolio is weighted towards bonds and money market funds, offering low returns but also very little risk. This is the kind of portfolio you’d want if you’re more scared of losing money than not making money - for example, if you’re retired and these funds are your sole source of income. Aggressive portfolios are heavily weighted towards stocks, and are better for those who can handle a few bear markets in exchange for overall higher returns.

There’s variation within these two groups - for example, a swing-for-the-fences aggressive portfolio may feature high-growth, small-cap stocks, while a less risky aggressive portfolio may focus more on blue-chip stocks. And finally, a balanced portfolio is - you guessed it - a balance between conservative and aggressive mindsets.

So what do conservative, balanced, and aggressive returns look like? Vanguard took a look at the annual returns of all three groups from 1926 through 2015. Here’s a summary of their findings:

Portfolio type

Average return

Best return

Worst return

Years with loss (out of 90)

Most conservative (all bonds)

5.4%

32.6%

-8.1%

14

Balanced (half bonds, half stocks)

8.3%

32.3%

-22.5%

17

Most aggressive (all stocks)

10.1%

54.2%

-43.1%

25

Basically, an aggressive portfolio gets you much better returns on average. On the other hand, you’re more likely to lose money, and more likely to lose big.

Invest aggressively while you can

A conservative portfolio can seem enticing, especially if your first experience with finance was the 2007 stock market crash. After all, humans are programmed to hate losing more than we like winning. But when you’re in your 20’s, you have a long time until retirement and can afford to ride out downturns. In fact, here’s one allocation rule of thumb: Subtract your age from 100, and invest that percent of your portfolio in equities. For example, if you’re 25, 75% of your money should be in stock. There are two main reasons that young people should be bold investors.

Reason 1: You won’t need the money anytime soon

If you’re already retired and your 401(k)’s value plummets, you’re in a really tight spot (this is what happened during the Great Recession). But if retirement is decades away, an individual year’s gain or loss doesn’t matter. While stocks may bounce around more than cash or bonds, on average, they deliver much better results - and at this stage of your life, you care about maximizing the average return.

Reason 2: Small differences grow over time

You often hear the miracle of compound interest cited as a reason to contribute to your retirement funds as early as possible (and you should!). It also highlights the importance of maximizing the returns on those contributions - a conservative portfolio’s slight lag in performance becomes massive gap as years go by.

Let’s say you’re 25, and plan to retire at 65. You want to contribute $5,000 annually towards your 401(k). Using Edward Jones’ calculator, how would your contributions perform according to Vanguard’s historical averages?

Portfolio type

Average return

Money at age 65

Most conservative (all bonds)

5.4%

$666,336

Balanced (half bonds, half stocks)

8.3%

$1,402,038

Most aggressive (all stocks)

10.1%

$2,273,988

Based on the averages, investing aggressively gives you over three times as much money to retire on compared to investing conservatively. Now, this doesn’t account for reallocation - as you get older and your retirement nears, you’ll want to shift your portfolio to more conservative investments to minimize risk - and averages aren’t guaranteed returns. But the difference is still striking, and a pretty compelling reason to focus heavily on equities so that your money grows as much as possible.

How can you get comfortable with aggressive investing?

Like we mentioned at the top, millennials have every right to be wary - the Great Recession’s impact still echoes through most of our bank accounts. According to the Wall Street Journal article, many people in their 20’s aren’t comfortable with their finances and go with conservative portfolios as the safe, default option. The article noted that, between the financial crisis and 9/11, twentysomethings are abnormally risk-averse. So how should you balance a fear of risk with a need for good returns?

Consider replicating target-date funds

Target-date funds are mutual funds tailored to a certain retirement date - target-date 2060 funds are for people who aim to retire in 2060, target-date 2030 funds are for those who retire in 2030, and so on. A target-date 2050 fund, for example, would be aimed at twentysomethings and heavily weighted toward equities. A target-date 2020 fund would be geared toward older investors, and have a much more conservative allocation. A target-date fund for your projected retirement year is a shortcut to age-appropriate investing.

Keep calm and rebalance

A 2014 Fidelity analysis found that their most successful investors were those who forgot they had a Fidelity account - basically, the people who didn’t overreact to market movements. Avoid the stress of watching your portfolio rise and fall by setting up automatic rebalancing, and re-evaluating your allocation once every few years at most. In the long run, a laissez-faire approach gets much better results than constant adjustments to market conditions.

Remember you’re playing the long game

You aren’t investing for two or five years from now - you’re investing for your retirement in forty-plus years. Downturns and bull markets alike are blips on the radar; an age-appropriate portfolio allocation and regular contributions are what really matter.

Millennials tend to invest far too conservatively, especially when it comes to retirement accounts. If you’re in your 20’s, don’t play it too safe - choose a portfolio allocation that puts your money to work.

Anisha Sekar has written for U.S. News and Marketwatch, and her work has been cited in Time, Marketplace, CNN and more. A personal finance enthusiast, she led NerdWallet's credit and debit card business, and currently writes about everything from getting out of debt to choosing the best health insurance plan.

Human Interest makes it easy to offer a 401(k) by taking administration off of your plate so that you can focus on running your business.

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